Microsoft earnings slip despite uptick in Windows sales

Lucrative Office software division declines 10%

Microsoft CEO Steve Ballmer, left, and Qualcomm CEO Paul Jacobs speak at the Consumer Electronics Show in Las Vegas earlier this month. Microsoft's latest quarterly earnings for the last quarter of 2012 slipped, even as the world's largest software maker showed modest progress adjusting to a shift away from the PCs that have been its financial foundation for decades. (Julie Jacobson/Associated Press)

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Microsoft's latest quarterly earnings slipped, even as the world's largest software maker showed modest progress adapting to a shift away from the personal computers that have been its financial foundation for decades.

The results announced Thursday are the first to include Windows 8. The program is a dramatic overhaul of the Microsoft Corp. operating system that powers most PCs. Windows 8 came out Oct. 26 with slightly more than two months left in Microsoft's fiscal second quarter.

Microsoft is counting on Windows 8 to help the company extend its franchise into tablet computers while still reaping revenue from a new breed of PCs. The redesigned software displays applications in a mosaic of interactive tiles instead of a staid menu. It can be controlled by touching on a display screen, as well as the traditional method of using a keyboard and a mouse.

Although sales of Windows 8 haven't been as impressive as investors hoped, revenue in Microsoft's Windows division climbed 24 per cent from the previous year. That includes sales that had to be deferred from earlier quarters because the purchases were made before Windows 8's release.

Surface tablet sales not disclosed

When Windows 8 finally hit the market, Microsoft also unveiled its own tablet computer, Surface, as a showcase for the operating system. Microsoft didn't disclose Thursday how many Surface devices were sold in the October-December period.

"I don't think they want to provide that because it won't be impressive," technology analyst Patrick Moorhead said.

Analysts have estimated Microsoft sold 750,000 to 1 million of the Surface units during the quarter, far below the nearly 23 million iPads that Apple said it shipped during the same period.

Microsoft booked its Surface sales in the Window division, accounting for some of the gains from the previous year. The Redmond, Wash., company is trying to get the Surface into more hands by releasing the device in 14 more countries and coming out with a more sophisticated version that can handle all Microsoft programs. The new model, called Surface Pro, will debut Feb. 9. The one already out runs a streamlined version of Windows 8 called RT.

Analysts say it's still far too early to reach any definitive conclusions about Windows 8 prospects because it will take time for people to get used to the new system. What's more, the companies that buy most Windows machines typically wait a year or two before changing to a new version of the operating system to ensure all the bugs are worked out.

"I kind of like the Windows segment," BGC Financial analyst Colin Gillis said, adding that the 24 per cent growth was "a little stronger than expected."

But another Microsoft division that includes another big moneymaker — the company's Office suite of software — didn't fare as well. Revenue in the Office division declined 10 per cent, a shortfall that may have spooked some investors.

Analyst Josh Olson of Edward Jones said he believes many of Microsoft's corporate customers may have held off on buying Office because a new version of that program is scheduled to come out early this year.

Microsoft ended December with $788 million US in deferred Office revenue. Most, if not all, that money is expected to be booked before the end of Microsoft's fiscal year in June.

Microsoft shares down 4% since last year

Microsoft earned $6.4 billion, or 76 cents per share, during the final three months of 2012. That was down 4 per cent from $6.6 billion, or 78 cents per share, a year earlier. The company's total revenue rose 3 per cent from the previous year to $21.5 billion.

'This is going to be a 'show-me' year for Microsoft, and there was nothing to really shout about in this quarter.'—Analyst Josh Olson

The earnings were a penny above the average estimate of analysts surveyed by FactSet, while the total revenue fell below analysts' projections by about $100 million.

Microsoft's stock shed 44 cents, or 1.6 per cent, to $27.19 in Thursday's extended trading, after the release of results. The stock has remained stuck below its price before Windows 8 and Surface came out, signalling that investors aren't pleased with the products' performance so far.

"This is going to be a 'show-me' year for Microsoft, and there was nothing to really shout about in this quarter," Olson said. "So what we are seeing is sort of a shrug from investors."

Microsoft is still trying to working with device makers to come up with the proper mix of machines at different prices to appeal to consumers and corporate customers, said Peter Klein, the company's chief financial officer.

"This is a big, ambitious reimagining of Windows and this quarter was the first step in that process," Klein told analysts in a Thursday conference call.

New mobile OS released

Besides debuting Windows and Surface during the most recent quarter, Microsoft also released a new version of its operating system for smartphones.

If Microsoft's revamped software for tablets and smartphones catches on, it would help the company overcome a downturn in PC sales, which has reduced licensing revenue during the past year. Worldwide PC shipments fell 3.5 per cent last year, marking the industry's first annual decline since 2001, according to the research firm Gartner Inc.

Despite Microsoft's high hopes and an elaborate marketing campaign, Windows 8 appears to have gotten off to a tepid start. Technology reviews have panned the software as too confusing and cumbersome to navigate, and none of the hundreds of devices running on Windows 8 emerged as a breakout hit during the holiday season.

A big chunk of Microsoft's Windows revenue in the holiday-season quarter came from sales that were made before the new operating system's release. Excluding revenue that had been deferred from previous quarter, Windows revenue increased 11 per cent from the same period in 2011.

Reiterating information released earlier this month, Microsoft said it has licensed more than 60 million copies of Windows 8. That puts the redesigned system on the same early sales trajectory as its predecessor, Windows 7, after it came out in 2009. It's unclear how many of the devices that have licensed Windows 8 are still sitting on store shelves.